Close the Gap – or Fail: The EU Risks Being Undermined by Widening Social and Economic Cracks

Cumbersome word, important topic: cohesion. The success of the European Union depends on whether it can reduce economic and social disparities in Europe.

The European Parliament elections are dominated by major issues. The war in Ukraine, the fight against climate change, migration, enlargement, geopolitics – there is no shortage of epochal challenges for the next legislative period. In light of these important issues, is it really necessary to deal with cohesion policy, the European funding programmes designed to help weaker regions with their economic development? Can‘t that wait?

In fact, the case is the opposite: European cohesion policy has never been more important than it will be in the coming years. This has to do with a very simple and basic principle of European integration – the European Union is strong above all when it sticks together.

However, cohesion is not limited to painstakingly achieved consensus votes in the European Council. In an EU with nearly 250 different regions, it relies also on whether it is possible to fulfil the single market’s promise of prosperity for as many people as possible.

If the EU allows entire regions to be left behind, it will jeopardise the political and social support it needs to combat climate change, support Ukraine or pursue a solidarity-based migration policy. Aligning European cohesion policy with the needs of the future is therefore one of the key tasks for the next legislative period – especially as the EU spends almost a third of its budget on it (€392 billion in the period from 2021 to 2027).

Union of Inequality

A look at the economic map shows just how great the need for action is. We still live in a Union of inequality. The former „EU convergence machine“ has started to stutter. For a long time, it looked as if the most serious cracks could actually be mended.

After joining the EU in 2004 and 2007, Central and Eastern European countries initially recorded high growth rates. A promising catch-up process had begun which, with some fluctuations, lasted for more than a decade. European funding programmes played an important role in this, although the exact impact of cohesion policy is difficult to evaluate and remains controversial to this day.

In the meantime, however, the situation has deteriorated. Growth rates are falling noticeably in many regions of the „new“ member states. Some regions in Southern Europe are also at risk of falling behind, which in many cases is due to the consequences of the economic and financial crisis that have still not been fully overcome, and in particular the subsequent euro crisis and the austerity policies that have been pursued to resolve it.

A whole series of European regions also find themselves in so-called „development traps“; prolonged periods of stagnation following periods of growth. This applies not only to regions in Southern or Central and Eastern European countries, but also to „old“ industrialised regions in Western Europe, such as Wallonia in Belgium or north-eastern France.

As a result, the EU is still characterised by a considerable wealth gap. Measured in terms of GDP per capita adjusted for purchasing power, a Luxembourger today has a standard of living around eight times that of someone living in north-west Bulgaria.

However, the future appears even more serious than the already problematic status quo. With digitalisation and the Green Deal, Europe‘s economy is facing an epochal transformation task. Due to the nature of this transformation, not all regions are equally well positioned to succeed without drawbacks.

As a result, the so-called „twin transition“ threatens to exacerbate existing regional income disparities, as a comprehensive analysis by the Bertelsmann Stiftung and the Vienna Institute for International Economic Studies from 2022 shows.

Many regions that already have good economic indicators are starting the transformation with an advantage. In particular, regions that are home to technologically sophisticated goods and services are likely to master the transition to greener and more digital business models well. These are often metropolitan regions such as Stuttgart or Stockholm, which are already recording above-average growth rates.

In contrast, many regions with comparatively low income levels are facing challenging years ahead. Areas that tend to be characterised by agriculture in particular often lack the infrastructure and innovative strength to successfully master the dual transition.

Eight out of 10 patent applications filed in the EU in the field of future green or digital technologies come from regions whose GDP is above the EU average. This is evidence of a considerable innovation gap that is likely to widen if no countermeasures are taken.

Promising Approaches

Nevertheless, the situation is not hopeless. Even today, cohesion policy is following the approach of anchoring sustainable productivity growth in Europe‘s weaker regions by promoting green and digital projects to a much greater extent than it did a few years ago.

This makes sense in essence, but considerable potential remains untapped in terms of implementation. For example, there is far too little cross-border cooperation between different regions, even though their economic profiles have considerable potential for synergy in some cases.

In particular, there is hardly any cooperation between stronger and weaker regions. Andalusia, for example, a „less developed region“ in EU parlance, has a great deal of innovative strength in virtual reality. It could cooperate well with Upper Bavaria here – but it does not.

More targeted support for regional innovation potential and the expansion of peer learning programmes could contribute to making regional innovation partnerships a powerful structural policy instrument in cohesion policy.

The European energy transition harbours particularly high potential for many weaker regions. By 2030, the share of green energy should be 45 percent. This target offers greater growth opportunities for many agricultural and structurally weak regions than for some booming metropolises.

The study „Energising EU Cohesion“ by Thomas Schwab et al. published in 2023 showed that rural regions in central France, some peripheral areas of Eastern Europe and many regions along the North Sea and Baltic coasts in particular are likely to benefit from their abundant wind energy potential.

Similarly, the Mediterranean regions in southern Italy, Greece, and Spain can utilise their solar potential even better. As a result, there is a need for cohesion and energy policy funding programmes to align, though they are currently not sufficiently coordinated.

Another form of leverage for more effective use of cohesion policy funds would be the support of regional administrative structures. Almost every EU region now has its own innovation strategy, which is sometimes more and sometimes less well conceived.

Together with a region‘s economic indicators, such strategies play a key role in determining what funding is invested in which areas. Sometimes, however, the success of an investment is not due to the strategy, but to its implementation. Time and again, European funding is not utilised or is wasted because the regional administrative structures are too inefficient.

Against this backdrop, it will be important to invest not only in economic projects as part of cohesion policy in the future, but also to invest in the development of competences of regional implementation authorities more than in the past.

This should help to increase the effectiveness of the funds. While there is still no consensus among experts on the specific impact of cohesion policy, there is empirical evidence of the link between institutional quality and the effectiveness of the funds utilised. However, this can only be achieved as part of a joint endeavour at the European, national, and regional level.

One possible approach for the EU here would be to focus even more strongly on conditionality requirements when allocating funds. However, these would have to be integrated into a larger cohesion policy governance reform, as effective conditionality mechanisms at regional level are an even more complex endeavour than at national level.

Ground-breaking Reform Process

The fact that it is time to break new ground in European cohesion policy has long been recognised by experts in Brussels. Last year, the European Commissioner for Cohesion and Reforms, Elisa Ferreira, convened an interdisciplinary group to develop ideas for adapting cohesion policy over a period of one year.

Although the final report published in February lacks specifics, in principle it is a step in the right direction. Among other things, it emphasises the importance of collaborative ecosystems, ascribes a central role to the quality of institutions, and provides arguments for the upcoming reform process as to why cohesion policy will continue to be needed in the future.

So far, however, this reform process has had a rather a niche existence. Its huge importance is not yet anchored in the political consciousness at the highest level. Cohesion policy is just as regularly ignored at European Council summits as it is in the European Commission president‘s State of the Union speeches.

To change this, those who pursue European cohesion policy should demonstrate more clearly why socio-economic convergence is not just a question of solidarity between the stronger and the weaker, but is in the common European interest in view of the multiple „Zeitenwende.“

If the EU drifts even further apart, it will not be able to overcome any of the challenges on which its future depends. Political decision-makers should be aware of this when the negotiations on the new multi-annual EU budget pick up speed after the European Parliament elections.

Translated from German by Kate Brown.

About the author

Malte Zabel is Co-Director of the Bertelsmann Stiftung’s Europe’s Future Program, which pursues projects on the EU’s sovereignty, a coherent internal market, and European public opinion.